We are conservative long-term investors and not active traders. We seek to identify companies with wide and sustainable “moats” (i.e. competitive advantages) that are attractively priced. We concentrate on our best ideas. As a consequence our portfolios typically hold approximately 15-20 common stocks.
Our clients entrust us with the management of their savings. It is not a responsibility that we take lightly. We consider ourselves a steward of our clients’ money. In all of our investment decision-making we put considerable thought into the potential downside. To borrow a phrase from the great Warren Buffett, we are as concerned about the return OF your money as the return ON your money. The ways that we protect your capital are twofold. First, we restrict our investment universe to shares of high-quality companies (more on that later). Second, we are disciplined in the price that we are willing to pay. We like to buy straw hats in winter.
Our investment process is often described as “value investing”. This is a term that is used by some to indicate an approach to investing that entails a focus on low valuations (i.e. low P/E multiples, low P/B ratios, etc.). On the use of this term, we agree with Warren Buffett…
But how, you will ask, does one decide what’s ‘attractive?’ In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.
We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation (which is neither illegal, immoral nor – in our view – financially fattening).
Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase”.
Chairman’s Letter, Berkshire Hathaway Annual Report, 1992
Our focus is on shares of companies that have certain characteristics. Specifically, we are interested in companies that possess what is often referred to as a “wide moat”. This term derives from imagery used by Warren Buffett to explain the concept of competitive advantage and is meant to signify an enviable market position that is difficult for competitors to attack. Moats are competitive advantages that allow companies to earn an above-average return on invested capital.
**Please contact your advisor to discuss the current investment environment of mentioned securities and the appropriateness of the investment for you.**
Our investment process is to identify companies with sustainable moats that generate a growing level of “free cash flow” (i.e. roughly, the money that is left over after all of the bills have been paid and provisions made for capital expenditures). Free cash flow can be used to buy back shares and / or pay an increasing level of dividend.
We are particularly interested in “compounding machines” (i.e. companies that can reinvest retained earnings at high rates of return). Typically, the companies in which we like to make investment are large-capitalization industry leaders that have a long track record of growing their earnings and dividends.
We are patient and opportunistic investors. We are inclined to wait for those rare occasions on which shares of high-quality companies can be bought at low-to-fair valuations. These opportunities are rare; great companies are rarely mispriced. However, all companies inevitably hit a rough patch and fall from favour.
We concentrate on our best investment ideas and are inclined to own shares of 18-20 companies in which we have a high level of conviction. We feel that this number of holdings allows us to focus on our best ideas and adequately diversify our clients’ accounts.
We are buy-and-hold investors and not traders. It can be tempting to engage in short-term trading strategies but in our experience it is far better to “buy right and sit tight”. To some, it may seem counterintuitive, however we firmly believe that “short-termism” and its bedfellow, buy and sell activity, are the enemies of investors. There is an old adage that goes, “Your portfolio is like a bar of soap – the more you touch it the smaller it becomes”.
We believe that in investing, simplicity trumps complexity. However, we are reminded by Warren Buffett that “simple does not mean easy”. In summary, we use a simple checklist in identifying potential investments:
- Does the company have a sustainable competitive advantage?
- Is there some degree of uncertainty or mispricing such that the shares are attractively valued?
- Is the company shareholder friendly (i.e. is rewarding shareholders one of the company’s priorities)?
- What are the company’s growth prospects?